Too Big To Fail (TBTF) has become part of our language–worse part of our reality. If you don’t already know, TBTF refers to centralization of financial assets in the United States into very small number of systemically important institutions. According to the Dallas Federal Reserve, the top 10 banks account for 61% of the assets in commercial banks up from 26% just 20 years ago. The biggest and worst offenders being Citi and Bank of America, which prove the weakest bank stocks in the sector.
Oddly enough, removing the risks from TBTF banks has support from both liberals and conservatives. I realized this reading one of my favorite blogs today: Naked Capitalism. Obviously, liberals have no issue with increasing regulations on big banks to ensure they act ethically and pose no systemic risk. In fact, much of the impetus for the passage of Dodd-Frank Act came from the left.
What about conservatives? One might think conservatives oppose regulation because it interferes with the workings of a free market capitalist system. And disapprove of regulation they do! But conservatives favor “creative destruction” and uninhibited growth. Moreover, conservatives stand strong against “socializing” anything, which should include the huge losses racked up by TBTF banks.
Anyone following the moves of the Federal Reserve since the financial crisis in 2008 knows almost every program enacted has operated as a bailout for TBTF banks’ balance sheets. In essence, banks can make tons of money holding short term debt at low rates and lending long term debt to clients at a higher rate. They net the spread for profit. The Fed has ensured rates stay low for exactly this purpose, although secondary effects also aid the general economy. Remember this–the Fed’s primary clients are banks, not the government not the public. Wouldn’t all those trillions of dollars been better served going into the real economy, rather than shoring up TBTF balance sheets?
Both conservatives and liberals can agree on the reprehensibility of impediments to sustainable growth. Dallas Fed President Richard Fisher made this point very clearly in their 2011 annual report (linked above). Anyone who reads Paul Krugman’s blog, titled the Conscience of a Liberal, has familiarity with his discussions on handling “zombie” banks: the Swedish solution. This refers to Sweden’s taking over all of the bad banks they had in 1994, closing them down, recapitalizing healthy banks to ensure lending to the public and private sector. Eventually, the Swedish government privatized all the assets.
The key take away from this discussion; theoretical grounds for ending TBTF exist. I would hope that Dodd-Frank was the first of several steps trying to put an end to TBTF. Anyone have any constructive thoughts on how to end TBTF?
